Fresh Del Monte Produce Inc (FDP) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Fresh Del Monte second quarter 2013 Earnings Conference Call. (Operator Instructions). I would now like to introduce to you today's host, Christine Cannella, for opening remarks. Please go ahead.

Thank you, Jessica. Good morning, everyone, and welcome to Fresh Del Monte's second quarter 2013 conference call. Joining me today are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer, and Richard Contreras, Senior Vice President and Chief Financial Officer.

This call complements are second quarter 2013 press releasewe made public this morning, and you can find that release or register for future distributions by visiting our website at www.freshdelmonte.com and clicking on Investor Relations.

This conference call is being webcast, and will be available for replay approximately two hours after conclusion of this call. Before we start, please remember that matters discussed on today's call may include Forward-looking statements within the provisions of the federal securities Safe Harbor laws. Forward-looking statements involve risks and uncertainties which are more fully described in today's press release and our SEC filings.

These risk factors may cause actual Company results to differ materially. This call is the property of Fresh Del Monte Produce. Redistribution, retransmission or rebroadcast of this call in any form without a written consents is strictly prohibited. Let me turn this call over to Mohammad

Thank you, Christine. Good morning everyone. We were pleased with our strong performance during the second quarter of 2013.

Where we sat back last year's second quarter in both net sales which were 7% higher and exceeded $1 billion. And in adjusted earnings per-share. Our performance demonstrates the continuation of the strength of Fresh Del Monte's core products and the vibrancy of the Del Monte brand across a broad range of distribution channels. Our results were further shaped by our increased presence in emerging markets and the strength of our global fresh-cut product line.

Now I would like to touch on a few highlights in our regions. In our North American business, we generated net sales of $540 million, a strong improvement over last year's second quarter. Our North American banana business grew with higher volume and increased demand.

We also benefited from exceptionally strong sales and volume growth in our fresh-cut business during the quarterdue to increased demand and consumption. Not only did we further capitalize on opportunities to reach new customers with our growing presence in non-traditional distribution channels, but we also increased sales of fresh-cut products to existing customers driving organic growth and creating new opportunities for future growth.

Fresh-cut remains one of the fastest growing trends as consumers seek healthy, fresh do-it-for-me convenience. All these factors and trends we believe position us well for the future. In Europe net sales grew 4% to $204 million in the second quarter.

We experienced substantial improvements in our European banana business with higher pricing during the second quarter and currently. We expanded our Prepared Food business by penetrating countries formerly part of the Soviet Union where we foresee strong demand for our fresh and prepared productsalong with the East region, continue to gain momentum during the second quarter with net sales of 30% -- 36% -- sorry, higher year-over-year.

Our banana business was robust with strong sales and volume growth. Sales in our other fresh produce business were also higher with strong volumes and increased pricing. We experienced strong demand for our Prepared Food products as wellwith the successful introduction of a wide range of new products during the quarter. We continue to expand in this region establishing new operations in Turkeyfurther penetrating new geographies to capture additional market share.

We experienced a much stronger quarter in Asia than last year especially in terms of profitabilitydriven primarily by higher pricing in our banana and pineapple business. We continue to invest in production capabilities in the Philippines to meet growing demand for our products in Asia and the Middle East.

In summary, the future holds great promise for Fresh Del Monte. A key to our success continues to be our ability to leverage the power of Del Monte brand combined with the sale and scope of our vertically integrated operations to create new inroads in distribution channels and in new and fast growing marketoffering fresh and prepared products and services that meet the needs of our customers. At this stage, I would like to turn the call over to Richard.

Thank you, Mohammad, and good morning. For the second quarter of 2013 excluding asset impairment, other charges, and a non-comparable item, we reported earnings per diluted share of $1.02 compared with earnings per diluted share of $1.01 in the prior-year period.

Net sales were $1,024,000,000 compared with $958 million in the second quarter of 2012. Gross profit was $106 million compared with gross profit of $116 million in the prior year. In addition, excluding asset impairment, other charges, and a non-comparable item, we reported operating income for the second quarter of 2013 of $63 million compared to $71 million in the prior year.

Net income was $57 million in the second quarter of 2013 compared with $58 million in the second quarter of 2012. In order to arrive at adjusted net income and adjusted earnings-per-share of $57 million or $1.02, we have excluded cash received as a result of a favorable court judgment of $16.6 million or $0.29 per share.

In our banana business segment during the second quarter net sales increased $32 million to $457 million on higher sales volume in Europe, the Middle East and North America. Overall volume was 5% higher compared with last year. Worldwide pricing increased 2% or $0.33 per box to $15.16 primarily due to higher pricing in Asia and the Middle East.

Gross profit decreased $3 million to $35 million compared with gross profit of $38 million a year ago. The decrease was primarily due to higher production and procurement costs of fruit from Central America. Total worldwide banana units costs increased 4% compared with last year's second quarter.

In our other fresh produce business segment net sales increased $24 million to $478 million compared with $454 million in the second quarter of 2012,and gross profit was 6% lower than the prior-year period. In our Gold Pineapple category net sales decreased $9 million to $136 million compared with $144 million in the prior year primarily due to lower volume.

Volume decreased 5% due to lower production in the Philippines and Central America, unit pricing was 1% lower and unit costs decreased 1%. In our Fresh-Cut category net sales increase $700 million to $117 million compared with $109 million in the prior year. The result of increased demand in North America and the Middle East.

Volume increased 5%, unit pricing increased 2% and unit costs was 3% higher than the prior year. In melons, net sales were $35 million compared with $36 million in the second quarter of 2012. Volume decreased 8%, unit pricing was 4% higher and unit costs was 1% higher.

In our Non-Tropical category net sales increased $24 million to $135 million compared with $111 million in the second quarter of 2012. The increase was primarily attributable to higher sales in our grape and avocado product lines in North America. Volume increased 20%, unit pricing increased 2%, and unit costs was 6% higher.

In our tomato category, net sales increased $2 million to $25 million compared with $23 million in the prior year. Volume decreased 6%, pricing was 16% higher, and unit costs was 10% higher. In our Prepared Foods segment, net sales increased $10 million to $89 million compared with $79 million in the second quarter of 2012.

The increase was primarily driven by increased sales in our canned pineapple, poultry and meat, and industrial pineapple product lines. Gross profit decreased $4 million to $9 million primarily due to lower selling prices in our pineapple and our industrial pineapple product lines.

Now, moving to costs. Banana fruit costs which includes our own production and procurement from growers increased 7% worldwide and represented 29% of our total costs of sales for the second quarter. It should be noted that during the quarter we experienced a strike and a blow down in Costa Rica. The volume decreased not only caused our production costs to increase, it also forced us to purchase higher price fruit in Ecuador in the quarter.

Carton costs increased 2% and represented 4% of our costs of sales, bunker fuel decreased 9% versus the prior year and represented 4% of our total costs of sales and ocean freight costs during the quarter which includes bunker fuel, third-party charters and fleet operating costs was 5% higher.

For the quarter ocean freight represented 13% of our total costs of sales. The foreign currency impact at the sales level for the second quarter compared to the prior year was unfavorable by $19 million and at the gross profit level the impact was unfavorable by $15 million compared to last year. Other income net for the quarter was $18 million compared with other expense net of $3 million in the second quarter of 2012.

The increase was primarily attributable to the favorable court judgment that I mentioned earlier. At the end of the quarter, our total debt was $123 million. As to stock repurchases during the second quarter, we repurchased 2,386,400 shares for approximately $64.2 million as part of our share repurchase program.

Income tax expense was $6 million during the quarter compared with income tax expense of $7 million in the prior-year period. As relates to capital spending, capital expenditures for the six months ended June were $57 million and capital expenditures for the full year are expected to be approximately $120 million. This concludes the financial review.

We will now turn the call over to the operator to begin Q&A.

Thank you. (Operator Instructions). We will go first it Brett Hundley with BB &T Capital Markets.

Good job this quarter.

Thank you, Brett.

I wanted to start with your banana costs. Of course, Richard, you noted some one-time issues in the quarter, and I am just wondering banana costs were up about 4% year-on-year, and they were up about 1.5% year-on-year in Q1. Noting those one-time issues, would it be fair to assume that your banana costs inflation would go more -- back more towards Q1 levels, or would you expect kind of something in between going forward? If you could just talk to that, that would be helpful.

Yes. No. Obviously there would be a recover because of those one-time items, especially the purchases in Ecuador which pricing obviously is always lower in Ecuador the second half of the year. And we should not have to go out and by as much which has been our practice reducing those volumes. So it should go down from what you saw in the second quarter.

Perfect. And then on Asia-Pac sales there were down 5%. I think that area performed better than we had expected towards what you pointed out, and we had the YEN model down about 13% year-on-year in the quarter. So I was wondering if you can talk -- I am parsing out businesses here, but if you can talk to banana in the region and local price trends there. Are you seeing local price trends there up in the double digits?

Yes, that is what we see right there and actually Japan and Korea performing this year compared to last year is quite significant in terms of higher pricing and better markets as well as the Middle East markets as well performing. Let us say in much better way than last year as well.

Okay. And are you seeing any issues now and going forward with the closure of Iran, Philippine production going else where. Can you just talk about some of the issues in the region?

No. There is nothing of that sort really. There is -- Iran has been a regular market and though during the year probably the last six, seven months there has been a reduction in volume going into Iran. But as we speak now, the markets are getting back to normal trend which means that they are receiving more fruit now. And I do not see any problems in that respect at all going forward.

Okay. That is helpful. Thank you. And then I wanted to focus on North America.

You guys noted higher volumes for the Company in banana. You pointed towards strength in your Fresh-Cut business, and I know that this -- you saw North American sales up I guess 7% year-on-year. I know this is a little bit of a tougher banana market this year in North America. But I was wondering if you can kind of talk about if there are other product groups that are helping you offset what I imagine is a tougher pricing environment in banana or is it largely just strength in your Fresh-Cut business there?

It is in both. Our volumes and bananas have increased year-over-year. I agree with you that the pricing in North America was a little bit softer than last year because of a competitive environment. But overall our business is changing, the mix of our business is changing. So banana still is a very important part of our business, but we have become a very important player to the Fresh-Cut business.

I would say a leading player in the Fresh-Cut business in terms of fruits. And the channels that we have opened in the last I would say seven, eight months, have trans formed this business into a different kind of a game. And going forward before the end of the year, we will be introducing new lines of businesses which will be protein sellers and different kinds of offerings that will also give us I believe a very important entry in the market and leverage in satisfying our customer needs be it on the retail side or the convenience side.

Okay. And then I just had one other question on the M&A environment , and as the Company looks for future growth in that regard. I was wondering if we could just get an update on -- are you placing more of and emphasis on geographic growth? Are you looking to grow specifically in a certain part of the world, or are you looking more at asset business type growth as you kind of evaluate what your targets would be?

We are going all across. We are going geographic. We are going core business. We are increasing assets, and I believe that we will do what is right for the Company. So that would be our objective.

Okay. Thank you.

We will go next to Jonathan Feeney with Janney.

Good morning. Thank you very much.

Hello, Jonathan. Good morning.

Mohammad, what is allowing for a better tone in banana prices specifically both in -- you since the middle of May, it appears that Europeans thought banana prices have improved somewhat significantly, and not only that those, but also in the kinds of increase you were just talking with Brett about in Asia. What is allowing for that?

I think what -- from Europe it is shorter supply. Let us say in one respect which is very important. The second thing, the Ecuador definitely has an impact on the market because Ecuador's short supply have impacted the markets in Europe particularly in the Mediterranean. In a normal year, when you have the normal supplies of Ecuador would have a flood of fruits in the Mediterranean and the East European -- the Eastern European and countries. And this year, we do not see that is the case. So it has not been spilling over into the Western markets. Let us say the European unit markets, and that has -- if you look at the whole picture, the macro picture, that is really what helped in stabilizing prices in these markets.

Now, going forward -- and the same thing it is like a trends. It is a world trend. If this happens in Europe, it reflects on their markets as well, and that is what really happened. In our case, I think our (inaudible) and our geographical coverage, and in this year in particular, our geographical coverage is on global basis has been so well-positioned that we are replacing the product where it is needed. Let us say, and that has helped us a lot in achieving better results and better performance.

Thank you. I guess I would just -- just one follow-up. I would just ask broadly has there been anything structural in the past say year or 18 months that would change your view as to the average say profitability of bananas over the next three to five years? Knowing full well, that it is going to have its ups and downs? Would you a say there is any structural changes positively or negatively?

I believe structurally, yes. There is definitely a structural change in the banana business and especially coming from Ecuador. Ecuador continues at the same pace that we see today, the banana business will definitely change going forward into the future. And what Ecuador is doing via the government through its new regulations and new procedures, they are doing the right thing even though that many people believe that it is against the producers. And the final analysis, it will be a better solution for the producers, for the country, less fruit, more money, and more income makes more sense to what is happening. And that has changed the game in the market today.

That is one thing. The other thing is that definitely it was like speculation market in the past, and now we are seeing a more structural, more organized, and disciplined way of marketing bananas. So in summary, going forward I do believe that markets will improve and the banana business in general will improve, maybe not significantly, but definitely will not go to the ways that we saw the last two or three years.

Great. Thank you very much.

(Operator Instructions). And we will go to Eric Larson with CL King.

Yes. Good morning, everyone. Congrats on a really nice quarter, Mohammad.

Thank you.

A couple questions. Just to dial back on your industrial pineapple production which was a difficult issue in your first quarter - - assuming that might be more of a -- of a profit issue for you in maybe the next quarter or two, but it seems that did not penalize you. Did you see a major turnaround in the industrial pineapple side in the quarter?

Yes. The first quarter, and the beginning of the second quarter, there was a lot of cheap prices coming out of Thailand. Thailand is one the biggest producers of industrial pineapple, and that was the reason why the prices were depressed and markets were also depressed.

Now in the last two, three months, this situation has changed because they had bad weather in Thailand during the last several months which reduced their production significantly. But, however, that does not translate into immediate change into the markets. But we do have an improvement, and we have been seeing improvement of pricing on industrial products, But it will take maybe a couple more months to see a significant turnaround.

But it is fair to say that it did not have the same drag on your earnings this quarter as it did in the first quarter, correct?

A definite improvement, yes.

Okay. All right. And, Mohammad, the two impressive things I thought obviously were North American sales as well as the Middle East. But in your prepared comments, you talked about new channels where your Fresh-Cut produce is going into North America, and I would assume that your expansion of markets in the Middle East was also significant. But what are some of the new channels that you are pursuing and having success with in Fresh-Cut sales.

I will give you and example. Schools, universities, jails, convenience stores, petro stations. I can give you a whole list of names, but this is part of it.

Okay. Yes. It is important that our convicts have some good fresh fruit. But the other thing is the Middle East obviously had a really big improvement.

You mentioned Turkey. Can you -- have you opened new distribution centers? Can you tell -- talk a little bit about the substantial year-over-year improvement there in the Middle East?

It is a continuing success story. Actually our presence there is just - - we are scratching just the surface right now. We have been very, very substantial opportunity going forward. So we are doing a lot of things there as we speak. We have things that we are not doing in Europe or in North America and, hopefully, we can replicate in these markets going in the future. So we are doing so many things that are really changing our business from a pure fruit company into a more food added value product lines which have different margins which has different client base and it is opening new horizon for Fresh Del Monte.

Okay. And then just a final kind of a field marketing question and really to highlight your growth again here, too. Your grapes, your Non-Tropical, your grape and avocado business also showed a substantial year-over-year increase, and I know that the avocado business has been very strong in units and growth in that. Did you have good unit growth in grapes in stuff as well, or was it pricing related to those? Can you talk a little bit about the Non-Tropical side of your North American business.

Which is like the deciduous are you referring to?

Yes. Your grapes and avocados. Your deciduous. Yes.

Well, the deciduous our main volumes come from Chile during the off-season which becomes between December say April.

Right.

The major bulk of our deciduous product. We do have as well as some programs from Mexico and some programs from California which is really minimal compared to our volumes coming out of Chile. So this is our deciduous. Our avocado business is a 12-month operation, and mainly it comes from Mexico, the majority of the fruit, as well as from California as well as Chile and Peru, but the majority comes from Mexico, and this business is growing. We are a growing slowly, but surely, and Fresh Del Monte will become a very important player in the next two to three years from now.

Okay. And then just a final question, Mohammad just on sort of capital allocation. Obviously you guys you bought back a lot of stock in the quarter which was great to see. Your debt is $120 million or $125 million. It is very low. Is the debt level -- are you comfortable with the debt level? And your incremental cash flow would still maybe partially go toward the share repurchase activity?

We are open to all kinds of opportunities. Repurchasing the shares, we did that, and we have been doing that. And we look at capital expenditure where we need to expand and whatever opportunities that come our way.

Okay. Thank you, Mohammad.

My pleasure.

This does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to Mohammad Abu-Ghazaleh for closing remarks.

Thank you so much. I thank you for joining us on this conference call today, and hope to be with you again next quarter and have a good day. Thank you everyone.

This does conclude today's conference. Thank you for your participation.